Freddie Mac rings alarm bell after $821m dip into red.

By James Quinn, Wall Street Correspondent
Last Updated: 10:58pm BST 06/08/2008
American mortgage giant Freddie Mac has warned that the US is only halfway into its current downturn, as it slumped into the red on the back of $3.5bn (£1.75bn) of writedowns and credit losses.

Freddie Mac, which with Fannie Mae owns or guarantees around $5 trillion worth of American mortgages, showed the housing crisis is far from over as it booked an $821m loss in the second quarter and slashed its dividend.

Chief financial officer Buddy Piszel said that, based on company data, US house prices have fallen 11pc and are expected to decline by 18pc to 20pc in total. "We are about halfway through," he added.

The comments put paid to suggestions that the mortgage crisis was beginning to bottom out, talk which partly fuelled Tuesday's 331-point Dow rally.

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Mr Piszel painted a dim future for Freddie, saying the government-sponsored mortgage house was unlikely to make a profit this year, and went further by saying the company should not spend its time on giving guidance on the extent of future losses, instead preferring to focus on its capital adequacy.

However, Freddie's capital levels make grim reading, with the company warning that there is a significant possibility that it may fail to meet the capital adequacy requirements set out by its key regulator, the Office of Federal Housing Enterprise Oversight. Failure to meet the requirements would see it classified as under-capitalised.

As a result, Freddie still plans to raise $5.5bn in fresh capital, but Mr Piszel stressed that the company was "not putting a deadline" on this.

Last month, Freddie and Fannie were the subject of unprecedented legislation enacted by the US Treasury and approved by Congress that allows Washington to inject both equity and debt into either company if it is felt necessary.

In addition, the Federal Reserve said it would allow both companies access to its discount funding window for the first time, although neither has used the facility yet.

Freddie's second-quarter results were worse than expected, showing an $821m loss in the three months to June, against a profit of $729m in the same quarter last year, and a $151m loss in the first quarter of this year.

This was the result of $2.5bn of credit loss provisions on defaulting mortgages, plus a further $1bn of writedowns on underperforming mortgages.

Freddie also plans to cut its dividend by 80pc - from 25c to 5c - from the next quarter, in a move that should save it more than $500m. Shares in Freddie Mac fell a further 12p